The Trouble with Stock Options

By Brian J. Hall, Kevin J. Murphy. 2003

767 citations recorded by the source corpus.

The trouble with options is that too many options are granted to too many people. Most options are granted below the top-executive level, and options are often an inefficient way to attract, retain and motivate executives and (especially) lower-level employees. Why, then, are options so prevalent? We discuss several explanations including changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We also offer an alternative hypothesis that we believe explains the over-use of options and several apparent puzzles: boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/0e5dd1586e8a5eddea30fb8b86ccf8af849e33cc

How researchers see this paper

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In Accounting

1. Gennaro Bernile
2. G. Jarrell

In Finance

1. Gennaro Bernile
2. G. Jarrell

In Strategy and Management

1. Gennaro Bernile
2. G. Jarrell

Citations in the corpus

• CEO Pay and Appointments: A Market-Based Explanation for Recent Trends (2004, unknown): “Even ignoring the more recent escalation in the use of executive stock options (Brian Hall and Murphy, 2002, 2003), the base salaries and bonuses of Forbes 800 CEOs increased from an average of $700,000 in 1970 (in 2002-constant dollars) to over $2.2 million in 2000.”
• Executive Compensation as an Agency Problem (2003, unknown): “Murphy (2002) and Hall and Murphy (2003) put forward a “perceived cost” explanation for the use of conventional, at -the-money options.”
• Executive Compensation: A New View from a Long-Term Perspective, 1936-2005 (2010, unknown): “Several studies have documented a strong correlation between executive compensation and the aggregate market value of firms in recent decades (Hall and Murphy 2003, Jensen and Murphy 2004, Gabaix and Landier 2007).”
• Assessing Managerial Power Theory (2015, unknown): “If boards were becoming more independent, these critics argue, MPT would predict that CEOs would have actually been less able to influence the pay-setting process and thus less able to realize increasing levels of pay (Conyon, 2006; Hall & Murphy, 2003; Murphy, 2002; Murphy & Zábojník, 2004).”
• Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications (2004, unknown): “Hall and Murphy (2003) show, however, that grants of stock-options, valued using the Black-Scholes formula, increased massively after the tax increase of 1993.”
• Overconfidence, Compensation Contracts, and Capital Budgeting (2011, unknown): “…the normative advice provided by academic finance to those who wish to align the decisions of managers with the desires of shareholders largely ignores this trait (e.g., Barnea, Haugen, and Senbet (1985), Murphy (1999), Hall and Murphy (2003); Hall (2003), and Edmans and Gabaix (2009)).”
• Field experiments in labor economics (2010, unknown): “Similarly, Hanushek and Raymond (2004) and Reback (2005) provide evidence on the distributional consequences on student achievement under the No Child Left Behind policy.”
• Why Has CEO Pay Increased so Much (2008, unknown): “Misperception of the cost of compensation Hall and Murphy (2003) and Jensen, Murphy andWruck (2004) have persuasively argued that at least some boards incorrectly perceived stock options to be inexpensive because options create no accounting charge and require no cash outlay.”
• The Executive Turnover Risk Premium (2014, unknown): “This appears to have been an important factor in explaining the development of executive compensation levels (Hall and Murphy, 2003; Murphy, 2013).”
• Executive Compensation: A Survey of Theory and Evidence (2017, unknown): “For behavioral reasons, managers appear to be more willing to accept options after the market has done well (Hall and Murphy, 2003; Bergman and Jenter, 2007; Murphy, 2013).”
• Are Incentive Contracts Rigged by Powerful CEOs (2011, unknown): “This is not surprising since by removing stock grants from the salary we have taken away the component that has accounted for much of the increase in the compensation of CEOs in the 1990s (Hall and Murphy, 2003).”